Economics
Economics is a social science seeking to analyze and describe the production, distribution, and consumption of goods and services.http://www.britannica.com/eb/article-9109547?query=Economics&ct= That is, economics studies how individuals and societies seek to satisfy needs and wants. Alfred Marshall informally described economics as "the study of man in the ordinary business of life" in the late 19th century; the vast number of topics to which the methods of economic theory have been applied suggests to some that economics is simply "that which economists do." The word "economics" is from the Greek words [oikos], meaning "family, household, estate," and νόμος [nomos], or "custom, law," and hence means "household management" or "management of the state." An economist is a person using economic concepts and data in the course of employment, or someone who has earned a university degree in the subject. Economics has two broad branches: microeconomics, where the unit of analysis is the individual agent, such as a household or firm, and macroeconomics, where the unit of analysis is an economy as a whole. Another division of the subject distinguishes positive economics, which seeks to predict and explain economic phenomena, from normative economics, which orders choices and actions by some criterion; such orderings necessarily involve subjective value judgments. Economic reasoning has in recent decades been increasingly applied to social situations where there is no monetary consideration, such as politics, law, psychology, history, religion, marriage and family life, and other social interactions. The approach to economics that is dominant today is usually referred to as mainstream economics. The more specific definition this approach implies was accurately captured by Lionel Robbins in 1932: "the science which studies human behaviour as a relation between scarce means having alternative uses." Scarcity means that available resources are insufficient to satisfy all wants and needs; absent scarcity and alternative uses of available resources, there is no economic problem. Heterodox economics, including institutional economics, Marxist economics, socialism, and green economics, sometimes make other grounding assumptions, such as that economics primarily deals with the exchange of value, and that labour (human effort) is the source of all value. Economics is a social science seeking to analyze and describe the production, distribution, and consumption of goods and services.1 That is, economics studies how individuals and societies seek to satisfy needs and wants. Alfred Marshall informally described economics as "the study of man in the ordinary business of life" in the late 19th century; the vast number of topics to which the methods of economic theory have been applied suggests to some that economics is simply "that which economists do." The word "economics" is from the Greek words οἶκος oikos, meaning "family, household, estate," and νόμος nomos, or "custom, law," and hence means "household management" or "management of the state." An economist is a person using economic concepts and data in the course of employment, or someone who has earned a university degree in the subject. Economics has two broad branches: microeconomics, where the unit of analysis is the individual agent, such as a household or firm, and macroeconomics, where the unit of analysis is an economy as a whole. Another division of the subject distinguishes positive economics, which seeks to predict and explain economic phenomena, from normative economics, which orders choices and actions by some criterion; such orderings necessarily involve subjective value judgments. Economic reasoning has in recent decades been increasingly applied to social situations where there is no monetary consideration, such as politics, law, psychology, history, religion, marriage and family life, and other social interactions. The approach to economics that is dominant today is usually referred to as mainstream economics. The more specific definition this approach implies was accurately captured by Lionel Robbins in 1932: "the science which studies human behaviour as a relation between scarce means having alternative uses." Scarcity means that available resources are insufficient to satisfy all wants and needs; absent scarcity and alternative uses of available resources, there is no economic problem. Heterodox economics, including institutional economics, Marxist economics, socialism, and green economics, sometimes make other grounding assumptions, such as that economics primarily deals with the exchange of value, and that labour (human effort) is the source of all value. Contents show 1 Economics and psychology 2 Areas of study in economics 3 Economic language and reasoning 4 Schools of economic thought 5 Alternative definitions of economics 5.1 Wealth definition 5.2 Welfare definition 5.3 Scarcity definition 6 Economic assumptions 6.1 Value 6.2 Supply and demand 6.3 Price 6.4 Scarcity 6.5 Marginalism 7 Development of economic thought 8 Economics and other disciplines 9 Criticism and contrarian perspectives 9.1 Is economics a science? 9.2 Alleged flaws and criticisms 9.2.1 McCloskey critique 10 See also 11 Notes and references 12 Further reading 13 External links edit Economics and psychology Behavioral finance Areas of study in economics Economics is usually divided into two main branches: * Microeconomics examines the economic behaviour of individual units such as businesses and households in face of scarcity and government interactions, as well as the economic consequences of these decisions on other actors. * Macroeconomics examines an economy as a whole with a view to understanding the interaction between economic aggregates such as national income, employment and inflation. Note that general equilibrium theory combines concepts of a macro-economic view of the economy, but does so from a strictly constructed microeconomic viewpoint. Attempts to join these two branches or to refute the distinction between them have been important motivators in much of recent economic thought, especially in the late 1970s and early 1980s. Today, the consensus view is arguably that good macroeconomics has solid microeconomic foundations. In other words, its premises ought to have theoretical and evidential support in microeconomics. A few authors (for example, Kurt Dopfer and Stuart Holland) also argue that 'mesoeconomics', which considers the intermediate level of economic organization such as markets and other institutional arrangements, should be considered a third branch of economic study. Economics can also be divided into numerous subdisciplines that do not always fit neatly into the macro-micro categorization. These subdisciplines include: international economics, development economics, industrial organization, public finance, economic psychology, economic sociology, institutional economics and economic geography. There are also methodologies used by economists whose underlying theories are important. * The most significant example may be econometrics, which applies statistical techniques to the study of economic data. Computational economics relies on mathematical methods, including econometrics. * Another trend which is more recent, and closer to microeconomics, is to use social psychology concepts (behavioural economics) and methods (experimental economics) to understand deviations from the predictions of neoclassical economics. * Evolutionary economics often deals with the otherwise difficult questions related to the role of 'routines' and 'capabilities' in explaining heterogeneity in firm outcomes. Finance has traditionally been considered a part of economics – as its body of results emerges naturally from microeconomics – but has today effectively established itself as a separate, though closely related, discipline. There has been an increasing trend for ideas and methods from economics to be applied in wider contexts. Since economic analysis focuses on decision making, it can be applied, with varying degrees of success, to any field where people are faced with alternatives – education, marriage, health, etc. Public choice theory studies how economic analysis can apply to those fields traditionally considered outside of economics. The areas of investigation in economics therefore overlap with other social sciences, including political science and sociology. The most prevalent political economy is loosely called capitalism. See political economy for the study of economics in the context of political science, and socioeconomics for the study of economics in the context of sociology. Economic language and reasoning Economics relies on rigorous styles of argument. Economic methodology has several interacting parts: * Collection of economic data. These data consist of measurable values of price and changes in price, for measurable commodities. For example: the cost to hire a worker for a week, or the cost of a particular commodity, and how much is typically used. * Formulation of models of economic relationships, for example, the relationship between the general level of prices and the general level of employment. This includes observable forms of economic activity, such as money, consumption, preferences, buying, selling, and prices. Some of the models are simple accounting models, while others postulate specific kinds of economic behaviour, such as utility or profit maximization. An example of a model that illustrates both of these aspects is the classical mathematical formulation of the Keynesian system involving the consumption function and the national income identity. This article will refer to such models as formal models, although they are not formal in the sense of formal logic. Economists often formulate very simple models in order to define the impact of just one variant changing. This is called the "ceteris paribus"-assumption (All others equal), meaning that all other things are assumed not to change during the period of observation. Example: "If the price of movie tickets rises, ceteris paribus the demand for popcorn falls." * Production of economic statistics. Taking the data collected, and applying the model being used to produce a representation of economic activity. For example, the "general price level" is a theoretical idea common to macroeconomic models. The specific inflation rate involves taking measurable prices, and a model of how people consume, and calculating what the "general price level" is from the data within the model. For example, suppose that diesel fuel costs 1 euro a litre: To calculate the price level would require a model of how much diesel an average person uses, and what fraction of their income is devoted to this —but it also requires having a model of how people use diesel, and what other goods they might substitute for it. * Reasoning within economic models. This process of reasoning (see the articles on informal logic, logical argument, fallacy) sometimes involves advanced mathematics. For instance, an established (though possibly unexamined) tradition among economists is to reason about economic variables in two-dimensional graphs in which curves representing relations between the axis variables are parameterized by various indices. A good example of this type of reasoning is exhibited by Paul Krugman's online essay, There's something about macro.There's Something About Macro by Paul Krugman - a brief introduction to macroeconomics. See also the article IS/LM model. One critical analysis of economic reasoning is studied in Paul Samuelson's thesis, Foundations of Economic Analysis: he identifies a class of assertions called operationally meaningful theorems which are those that can be meaningfully formulated within an economic model.Paul Samuelson, Foundations of Economic Analysis. As usual in science, the conclusions obtained by reasoning have a predictive as well as confirmative (or dismissive) value. An example of the predictive value of economic theory is a prediction as to the effect of current deficits on interest rates 10 years into the future. An example of the confirmative value of economic theory would be confirmation (or dismissal) of theories concerning the relation between marginal tax rates and the deficit. Formal modelling, which has been adapted to some extent by all branches of economics, is motivated by general principles of consistency and completeness. It is not identical to what is often referred to as mathematical economics; this includes, but is not limited to, an attempt to set microeconomics, in particular general equilibrium, on solid mathematical foundations. Some reject mathematical economics: The Austrian School of economics believes that anything beyond simple logic is often unnecessary and inappropriate for economic analysis. In fact, the entire empirical-deductive framework sketched in this section may be rejected outright by that school. However, the framework sketched here accurately represents the current predominant view of economics. Schools of economic thought *'Modern 'mainstream' economics:' Mainstream economics begins with the premise that resources are scarce and that it is necessary to choose between competing alternatives. That is, economics deals with tradeoffs. With scarcity, choosing one alternative implies forgoing another alternative—the opportunity cost. The opportunity cost creates an implicit price relationship between competing alternatives. In addition, in both market oriented and planned economies, scarcity is often explicitly quantified by price relationships. Understanding choices by individuals and groups is central. Economists believe that incentives and desires play an important role in shaping decision making. Concepts from the Utilitarian school of philosophy are used as analytical concepts within economics, though economists appreciate that society may not adopt utilitarian objectives. One example of this is the idea of a utility function, which is assumed to represent how economic agents rank the choices given to them. Then the utility function ranks available choices from best to worst, and the agent gradually learns to choose the best-ranked choice in the feasible set of his alternatives. On a microeconomic level, some economists extend economic analysis to all personal decisions. An alternative can be thought of as a vector where the entries are answers not only to questions like "How many eggs should I buy?", but also "How many hours should I spend with my kids?", and "How long should I spend brushing my teeth?". Modern mainstream economics builds on earlier work, but perhaps primarily that of the neoclassical economists. Neoclassical economic developed beginning in the late 19th century and includes models based on choice under scarcity deemed applicable to a wide range of activities, including the very long term and the non-economic. Mainstream economics also acknowledges the existence of market failure and some insights from Keynesian economics. It looks to game theory and asymmetric information to solve problems on a microeconomic level. Many important insights on collective behaviour (for example, emergence of organizations) have been incorporated from institutional economics via new institutionalism. *'Alternative approaches:' **'Post-Keynesian economics': An alternative school - one of the successors to the Keynesian tradition with a focus on macroeconomics. They concentrate on macroeconomic rigidities and adjustment processes, and research microfoundations for their models based on real-life practices rather than simple optimizing models. Generally associated with Cambridge, England and the work of Joan Robinson. (see Post-Keynesian economics) **'New-Keynesian economics': The other school associated with developments in the Keynesian fashion. These researchers tend to share with other Neoclassical economists the emphasis on models based on microfoundations and optimizing behaviour but focus more narrowly on standard Keynesian themes such as price and wage rigidity. These are usually made to be endogenous features of these models, rather than simply assumed as in older style Keynesian ones. (see New-Keynesian economics) **'Other alternatives': There are many types of economist, and many of them are considerably outside the mainstream. Marxian economics, Socialist economics, green economics, Austrian economics, and Old Keynesian economics still have many voices in academia. **'Eclectic Economists': The term 'eclectic' means selecting and using what seems best from various sources, systems or schools of thought. Eclectic economists tend to economize to get an optimal result for the problem at hand. The assumption of utility can for example be used, not to imply that people really have such a utility, but as an efficient approximation. Such economists might be 'main stream' or neoclassical in one publication and do political economy in another publication. Famous schools or trends of thought referring to a particular style of economics practiced at and disseminated from well-defined groups of academicians that have become known worldwide, may be generally summarized as follows: *Austrian School *Chicago School *Freiburg School *Keynesian economics *Post-Keynesian economics *School of Lausanne *Stockholm school Alternative definitions of economics This sections extends the discussion of the definition of Economics at the beginning of the article. Economics is the study of human choice behaviour. All of economics whether represented through articulation or empirically through mathematical means is essentially an analysis of the behaviour choices of human beings. Wealth definition The earliest definitions of political economy were simple, elegant statements defining it as the study of wealth. The first scientific approach to the subject was inaugurated by Aristotle, whose influence is still recognised today by the Austrian School, among others. Adam Smith, author of the seminal work The Wealth of Nations and regarded by some as the "father of modern economics," defines economics simply as "The science of wealth."An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith (abridged version) (Originally published in 1776) Smith offered another definition, "The Science relating to the laws of production, distribution and exchange." Wealth was defined as the specialization of labour which allowed a nation to produce more with its supply of labour and resources. This definition divided Smith and Hume from previous definitions which defined wealth as gold. Hume argued that gold without increased activity simply serves to raise prices Hume, David. "Of the Balance of Trade." Reprinted in Selected Essays. Oxford University Press: 1998 John Stuart Mill defined economics as "The practical science of production and distribution of wealth"; this definition was adopted by the Concise Oxford English Dictionary even though it does not include the vital role of consumption. For Mill, wealth is defined as the stock of useful things.Mill, John Stuart: "Principles of Political Economy with Some of Their Applications to Social Philosophy.", pages 1, 8. C.C. Little & J. Brown, 1848. Definitions in terms of wealth emphasize production and consumption. The accounting measures usually used measure the pay received for work and the price paid for goods, and do not deal with the economic activities of those not significantly involved in buying and selling (for example, retired people, beggars, peasants). For economists of this period, they are considered non-productive, and non-productive activity is considered a kind of cost on society. This interpretation gave economics a narrow focus that was rejected by many as placing wealth in the forefront and man in the background; John Ruskin referred to political economy as a "Bastard science, the science of getting riches." John Ruskin "Unto This Last" Essays From the Cornhill Magazine 1860 Welfare definition Later definitions evolved to include human activity, advocating a shift toward the modern view of economics as primarily a study of man and of human welfare, not of money. Alfred Marshall in his 1890 book Principles of Economics wrote, "Political Economy or Economics is a study of mankind in the ordinary business of Life; it examines the part of the individual and social action which is most closely connected with the attainment and with the use of material requisites of well-being."Alfred Marshall, Principles of Economics, 1890. The welfare definition was still criticized as too narrowly materialistic. It ignores, for example, the non-material aspects of the services of a doctor or a dancer. A theory of wages which ignored all those sums paid for immaterial services was incomplete. Welfare could not be quantitatively measured, because the marginal significance of money differs from rich to the poor (that is, $100 is relatively more important to the well-being of a poor person than to that of a wealthy person). Moreover, the activities of production and distribution of goods such as alcohol and tobacco may not be conducive to human welfare, but these scarce goods do satisfy innate human wants and desires. Marxist economics still focuses on a welfare definition. In addition, several critiques of mainstream economics begin from the argument that current economic practice does not adequately measure welfare, but only monetized activity, which is an inadequate approximation of welfare. Scarcity definition This definition allowed a potentially broader field of study, but it, too, has its critics. It is most amenable to those who consider economics a pure science, but others object that it reduces economics merely to a valuation theory. It ignores how values are fixed, prices are determined and national income is generated. It also ignores unemployment and other problems arising due to abundance. This definition cannot apply to such Keynesian concerns as cyclical instability, full employment, and economic growth. The focus on scarcity continues to dominate neoclassical economics, which, in turn, predominates in most academic economics departments. It has been criticized in recent years from a variety of quarters, including institutional economics and evolutionary economics. Economic assumptions Value It could be argued that beneath an economic theory is a theory of value. Value can be defined as the underlying activity which economics describes and measures. It is what is "really" happening. like this 1922 US $100 gold note could be exchanged by the bearer for its face value in gold.]] Adam Smith defined "labour" as the underlying source of value, and "the labour theory of value" underlies the work of Karl Marx, David Ricardo and many other classical economists. The "labour theory of value" argues that a good or service is worth the labour that it takes to produce. For most, this value determines a commodity's price. This labour theory of price and the closely related cost-of-production theory of value dominates the work of most classical economists, but those theories are far from the only accepted basis for "value". For example, neoclassical economists and Austrian School economists prefer the marginal theory of value. "Market theory" argues that there is no "value" separate from price, that the market incorporates all available information into price, and that so long as markets are open, that price and the value are one and the same. This theory rests on the idea of the "rational economic actor". This was originally asserted by Mill. Another set of theories rests on the idea that there is a basic external scarcity, and that "value" represents the relationship to that basic scarcity (or lack thereof). These theories include those based on economics being limited by energy or based on a "gold standard". Robert A. Heinlein said that the value of an object is what an object is worth to each person, and that the value of any object varies from person to person. All of these value theories are used in current economic work with varying degrees of acceptance. Supply and demand model describes how prices vary as a result of a balance between product availability and demand. The graph depicts an increase in demand from D1 to D2 along with the consequent increase in price and quantity required to reach a new equilibrium point on the supply curve (S).]] In microeconomic theory supply and demand attempts to describe, explain, and predict the price and quantity of goods sold in perfectly competitive markets. It is one of the most fundamental economic models, ubiquitously used as a basic building block in a wide range of more detailed economic models and theories. To define, demand is the quantity of a product that a consumer or buyer would be willing and able to buy at any given price in a given period of time. Demand is often represented as a table or a graph relating price and quantity demanded. Most economic models assume that consumers make rational choices about how much to buy in order to maximize their utility - they spend their income on the products that will give them the most happiness at the least cost. The law of demand states that, in general, price and quantity demanded are inversely related. In other words, the higher the price of a product, the less of it consumers will buy. Supply is the quantity of goods that a producer or a supplier is willing to bring into the market for the purpose of sale at any given price in a given period of time. Supply is often represented as a table or a graph relating price and quantity supplied. Like consumers, producers are assumed to be utility-maximizing, attempting to produce the amount of goods that will bring them the greatest possible profit. The law of supply states that price and quantity supplied are directly proportional. In other words, the higher the price of a product, the more of it producers will create. The theory of supply and demand is crucial to explaining the market economy in that it explains the mechanisms by which prices and levels of production are set. Price In order to measure the ebb and flow of supply and demand, a measurable value is needed. The oldest and most commonly used is price, or the going rate of exchange between buyers and sellers in a market. Price theory, therefore, charts the movement of measurable quantities over time, and the relationship between price and other measurable variables. In Adam Smith's Wealth of Nations, this was the trade-off between price and convenience. A great deal of economic theory is based around prices and the theory of supply and demand. In economic theory, the most efficient form of communication comes about when changes to an economy occur through price, such as when an increase in supply leads to a lower price, or an increase in demand leads to a higher price. s are determined by the relative supply and demand of different currencies — an important issue in international trade.]] In many practical economic models, some form of "price stickiness" is incorporated to model the fact that prices do not move fluidly in many markets. Economic policy often revolves around arguments about the cause of "economic friction", or price stickiness, and which is, therefore, preventing the supply and demand from reaching equilibrium. Another area of economic controversy is about whether price measures the value of a good correctly. In mainstream market economics, where there are significant scarcities not factored into price, there is said to be an externalization, which is a cost or benefit to actors other than the buyer and seller, of which many examples exist, including pollution (a cost to others) and education (a benefit to others). Market economics predicts that scarce goods which are under-priced because of externalities are over-consumed (See social cost), and that scarce goods that are over-priced are under-consumed. This leads into public goods theory. Governments often tax and otherwise restrict the sale of goods that have negative externalities and subsidize or otherwise promote the purchase of goods that have positive externalities in an effort to correct the distortion in price caused by these externalities. Scarcity Economic analysis is fundamentally about the maximization of something (leisure time, wealth, health, happiness - all commonly reduced to the concept of utility) subject to constraints. These constraints - or scarcity - inevitably define a trade-off. For example, one can have more money by working harder, but less time (there are only so many hours in a day, so time is scarce). One can have more radishes only at the expense of, for example, fewer carrots (you only have so much land on which to grow food - land is scarce). All economies in the world face scarcity. Scarcity is defined as: when the price is zero, the quantity demanded exceeds the quantity supplied. Price is a measure of relative scarcity. If all other market variables are held constant; When the price is rising, this indicates the commodity is becoming relatively more scarce. When the price is falling, this indicates the commodity is becoming relatively less scarce. Adam Smith considered, for example, the trade-off between time, or convenience, and money. He discussed how a person could live near town, and pay more for rent of his home, or live farther away and pay less, "paying the difference out of his convenience". s on the floor of the New York Stock Exchange always involve a face-to-face interaction. There is one podium/desk on the trading floor for each of the exchange's three thousand or so stocks.]] Marginalism In marginalist economic theory, the price level is determined by the marginal cost and marginal utility. The price of all goods will be the cost of making the last one that people will purchase, and the price of all the employees in a company will be the cost of hiring the last one the business needs. Marginalism looks at decisions based on "the margins", what the cost to produce the next unit is, versus how much it is expected to return in profit. When the marginal return of an action reaches zero, the action stops. Marginal utility is how much more happiness or use a person receives from a purchase in contrast with buying less. Marginal rewards are often subject to diminishing returns: Less reward is obtained from more production or consumption. For example, the 10th bar of chocolate that a person consumes does not taste as good as the first, and so brings less marginal utility. Marginalism became increasingly important in economic theory in the late 19th century, and is a tool which is used to analyze how economic systems will react. Marginal cost of production divides costs into "fixed" costs which must be paid regardless of how many of a commodity are produced, and "variable costs". The marginal cost is the variable cost of the last unit. Marginalism states that when the profit from the next unit will be zero, that unit will not be produced. The marginalist theory of price level runs counter to the classical theory of price being determined by the amount of labour congealed in a commodity. Development of economic thought thumb|[[Adam Smith, generally regarded as the Father of Economics, author of An Inquiry into the Nature and Causes of the Wealth of Nations, generally known as The Wealth of Nations.]] The term economics was coined around 1870 and popularized by influential "neoclassical" economists such as Alfred Marshall (Welfare definition), as a substitute for the earlier term political economy, which referred to "the economy of polities" – competing states. The term political economy was used through the 18th and 19th centuries, with Adam Smith, David Ricardo and Karl Marx as its main thinkers and which today is frequently referred to as the "classical" economic theory. Both "economy" and "economics" are derived from the Greek oikos-'' for "house" or "settlement", and ''nomos for "laws" or "norms". Economic thought may be roughly divided into three phases: Premodern (Greek, Roman, Arab), Early modern (mercantilist, physiocrats) and Modern (since Adam Smith in the late 18th century). Systematic economic theory has been developed mainly since the birth of the modern era. Joseph Schumpeter specifically credits the development of the scientific study of economics to the Late Scholastics, particularly those of 15th and 16th century Spain (see his History of Economic Analysis). There have been different and competing schools of economic thought pertaining to capitalism from the late 18th century to the present day. Important schools of thought are Mercantilism, Kameralism, Physiocracy, Classical economics, Manchester school, Austrian School, Marxian economics, Chicago School. Within macroeconomics there is Keynesian economics, Post-Keynesian economics, Monetarism, New classical economics and Supply-side economics. New alternative developments include Evolutionary economics, Dependency theory, World systems theory and Associative economics. Economics and other disciplines here is some tension between economics and theories of ethics, historically a branch of philosophy, which emphasizes how people ought to conduct ourselves and balances of rights and duties. Modern economics deals with this tension explicitly: According to some thinkers such as John Syko, a theory of economics is also, or implies also, a theory of moral reasoning. One way economists deal with this is to qualify discussions of economic choice by noting the qualifier ceteris paribus ("all other things held constant...") referring to moral or social factors that are (for the sake of argument) held equivalent for all choices that one might make. For exploration of this issue, see the moral purchasing article. Another premise is that economics fits within a finite ecosystem where there are at least some abundant resources. For instance, when fuelling a fire, people are usually concerned with finding the wood, and not with finding the air to burn it with. Economics explicitly does not deal with free abundant inputs – one criticism is that it often conflicts with ecology's view of what affects what. Human beings are, according to ecologists, merely one species participating in a vast energy system on this planet – economy is a subset of ecology that deals with just one species' habits and wants. ''See nature's services for the economic view of ecology and green economics for the view in which economics is a subset of ecology. A third premise is that economics suggests market forms and other means of distribution of scarce goods that affect not just "desires and wants" but also "needs" and "habits". Much of so-called economic "choice" is involuntary, certainly given the conditioning that people have to expect certain quality of life. This leads to one of the most hotly debated areas in economic policy: namely, the effect and efficacy of welfare policies. Libertarians view this as a failure to respect economic reasoning. They argue that redistribution of wealth is morally and economically wrong. And socialists view it as a failure of economics to respect society. They argue that disparities of wealth should not have been allowed in the first place. This led to both 19th century labour economics and 20th century welfare economics before being subsumed into human development theory. Information theory has been applied to economics since the work of Ronald Coase in the 1930s. However, with Herbert Simon and John von Neumann in the 1950s, it gathered a more specific formalism as part of game theory. This emphasizes that the decision-making process itself is costly. The older term for economics, political economy, is still often used instead of economics, especially by certain economists such as Marxists. Use of this term often signals a basic disagreement with the terminology or paradigm of market economics. Political economy explicitly brings political considerations into economic analysis and is therefore openly normative, although this can be said of many economic recommendations as well, despite claims to being positive. Some mainstream universities (such as the University of Toronto and many in the United Kingdom) have a "political economy" department rather than an "economics" department. Marxist economics generally denies the trade-off of time for money. In the Marxist view, concentrated control over the means of production is the basis for the allocation of resources among classes. Scarcity of any particular physical resource is subsidiary to the central question of power relationships embedded in the means of production. Criticism and contrarian perspectives Is economics a science? One of the marks of a science is the use of the scientific method and the ability to establish hypothesis and make predictions which can then be tested with data. Unlike natural scientists and in a way similar to what happens in other social sciences, economists are generally unable to test their theories due to its impracticality. Unlike the natural sciences, economics yields no natural laws or universal constants, so this has led some critics to argue that economics is not a science, or at best, is just a soft science. Dick Richardson, Ph.D., Professor, Integrative Biology, University of Texas at Austin — Economics is NOT Natural Science! (It is technology of Social Science.), accessed May 2006 Economists in general reply that while this aspect presents serious difficulties, they in fact do test their hypothesis using statistical methods such as econometrics, using the data generated in the real world. Harvard University Department of Economics — Al Roth - Gund Professor of Economics and Business Administration, Harvard Economics Department and Harvard Business School, accessed May 2006 The field of experimental economics has also seen efforts to test at least some predictions of economic theories in a simulated laboratory setting – an endeavour which earned Vernon Smith the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 2002. Alleged flaws and criticisms Economics has been persistently criticized for its heavy reliance on unrealistic, unobservable, or unverifiable assumptions. Some people reply to this criticism by saying that the unrealistic assumptions of economics result from abstraction from unimportant details, and abstraction is necessary for knowledge of a complex real world. So, far from unrealistic assumptions detracting from the epistemic worth of economics, such assumptions are essential for economic knowledge. Denominating this explanation the abstractionist defence, and after clarifying abstraction, unrealistic assumptions and kindred notions, some studies have shown that this abstractionist defence does not successfully rebut the position of those who criticize economics for its unrealistic assumptions. International Network for Economic Method — Journal of Economic Methodology Volume 3, Number 2, December 1996, accessed May 2006 Economics is a field of study with various schools and currents of thought. As a result, as in many other fields, there exists a considerable distribution of opinions, approaches and theories. Some of these reach opposite conclusions or, due to the differences in underlying assumptions, contradict each other. JSTOR: American Economic Review — Consensus and Dissension among Economists: An Empirical Inquiry Bruno S. Frey, Werner W. Pommerehne, Friedrich Schneider, Guy Gilbert American Economic Review, Vol. 74, No. 5 (Dec., 1984), accessed May 2006, University of Illinois at Chicago — Rhetorical Criticism in Economics, Deirdre McCloskey, Professor of the Liberal Arts and Sciences, University of Illinois at Chicago, Professor of Economics, History, English, accessed May 2006. Criticism on several topics in economics can be found elsewhere, in both general and specialized literature (for example, General equilibrium, Pareto efficiency, Marginalism, Behavioral finance, Behavioral economics, Keynesian economics, Monetarism, Endogenous growth theory, Comparative advantage, Kuznets curve, Laffer curve et al.). McCloskey critique Although the conventional way of connecting the economic model with the world is through econometric analysis, Professor Deirdre McCloskey cites many examples in which professors of econometrics were able to use the same data to both prove and disprove the applicability of a model's conclusions. She argues that the vast efforts expended by economists on analytical equations is essentially wasted effort. See also * Behavioral finance * Budgets * Cost containment * Costs and cost analysis * Division of labor * Health economics * Healthcare costs * IQ and Global Inequality * Mergers and acquisitions * Money * Personal finance * Political economic systems * Resource allocation * Socioeconomics Notes and references Further reading * Frontiers in Economics - ed. K. F. Zimmermann, Springer-Science, 2002. - A summary of surveys on different areas in economics. *The Autistic Economist - Yale Economic Review - How and why the dismal science embraces theory over reality. *''Nature of Things'' by Jean-Baptiste Say - an essay in which Say claims that economics is not an ethical system that one can simply refute on the basis that one does not accept its values: it is a collection of theories and models that explain inductively found principles. External links * XLab - UC Berkeley Experimental Social Science Laboratory: Human Subject Research in Economics Category:Economics Category:Social sciences Category:School subjects